The reason of difficulties encountered by SMEs in securing bank loans

Mirco-credit financing can help spur the growth of small and medium enterprise. The SMEs mirco-credit is usually defined as a business with total loans of less than RM25000.SMEs is a medium-size business which is determined on the total sales or revenue generated in a years. It plays an important role to stimulate the economic growth of country to become more competitive and attractiveness in the world economy. However, this type of enterprises often faces the problem of the insufficient supply of micro-credit to conduct their business. It is because the banks perceive mirco-credit as an activity with high risk and low return activity. Fortunately, our government had put in the efforts to calls for more loans to be available in order to support the SMEs in our country.

The reason for difficulty in securing bank loans is the banks often require a guarantor or securities. To prevent the loan becomes bad debts, banks needs guarantor or securities to settle the amount loan. However, assets of small and medium enterprise is limit and few if compare to large enterprise. If small and medium enterprise no guarantor to guarantee them, they must have enough asset become security to apply loan. In case the enterprise is initially stated business, they do not have enough assets to apply loan. Then, they dint has opportunities to expand the business. In addition, small and medium enterprise is cant issue share to public likes public company. They can’t collect their funds from issue share to public. Then, they have limitation of capital. Loan is very important to them to expand their business.

Besides that, another reason is small and medium enterprise should prepare a thorough, complete and perfect business plan. The business plan include how you plan to repay the loan if it’s granted and objective of apply the loan. The banks do so because the banks wants prevent the loan to illegal. In addition, they want confirm small and medium enterprise has capable to repay the loan. It also want make sure whether the small and medium enterprise got potential to expand their business or not. In results, if the business plan is not prefect or uninspired, small and medium enterprise will difficult to apply the loan.

On the other hands, banks might be increase the interest rate of loan in future time period. This is because banks needs prevent the risk of economics’ country going bad and cover back the lost. However, banks just can increase the interest rate when the loan agreement allowed. [Penwira Habib Malaysia Bhd v Lim Hong Tatt (1989)]. Thus, the small and medium enterprise can’t expect the time value to settle the loan and total amount of loan needs to pay when maturity date. Then, small and medium enterprise must think carefully when apply the loans.

In addition, the restriction of approve loan is more difficult compare to large company.
Banks can see large company enterprise performance and information by market share and annual report provide by them. Banks can recall the loan when large company facing liquidity or freeze problem at the moment. However, small and medium enterprise does not provide such as information in public. The banks Is hard to measure the performance and no enough information to small and enterprise. For secure, the restriction of approve loan to small and medium enterprise is tightly and strictly compare to large company.

Besides that, past performance of small and medium enterprise also become a one of difficult in securing loan. Since lack of Information Company, past performance also needs take in account to banks decides to approve the loan. If the past performance of small and medium enterprise is worst, the banks are no confidence to approve the loan to them. It is to prevent the enterprise going worse again until cant facing the repayment the loan. Banks mostly request 3 years of financial statements to allow them to compare and decide the performance of enterprise. On the contrary, if the past performance of enterprise excellence, the opportunities to approve the loan is high.

On the other hands, prospect of the future for the objective of business also is one of reason for difficulty securing bank loan. Banks will decided approve the loan whether the main business of small and medium enterprise is popular and appreciate or not. Unpopular and unappreciated business is risky to bank to approve the loan. It is because banks cant expected whether the business that they carry will become famous in future. Thus, it will become difficult for creative small and medium enterprise to apply loan conduct new business.